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IBM Sells Disk Biz, Vows to Fight On in Storage
by Timothy Prickett Morgan
After months of intensive negotiations, IBM has inked an agreement that will see the company exit the hard disk drive business that it established in 1956. Hitachi has acquired nearly all of IBM's intellectual property, research, manufacturing, and sales resources associated with the disk drive business for $2.05 billion. Although IBM is exiting the disk drive business, it has vowed that it will continue to be an aggressive maker of disk arrays and other products that incorporate disks.
As we reported back in April, the fact that IBM, which is the number-three maker of disk drives in the world behind Seagate Technology and Maxtor, would just abandon this business shows just how far its credibility in the disk drive arena has fallen since its problems with 10K RPM disks and its delays in getting 15K RPM disks to market. Disk drives are entrusted with holding crucial data, and if a vendor slips up, it can take years to recover. With IBM losing several hundred million dollars a year on disk drives last year, and prospects for revenue growth looking poor this year, it is not exactly surprising that Hitachi could acquire most of IBM's disk business for $2.05 billion—including patents and research arguably worth billions of dollars—even when it was generating around $3 billion in sales in 2001. (That's one heck of a discount, by the way.) There are only a few companies in the world that want to be dominant players in disk drives, and the other two besides Hitachi do not have the financial resources to pony up even $2 billion, much less the $3 billion or so Hitachi will shell out over the next few years to acquire IBM's disk business.
The one mystery is what disk drive assets IBM has kept. Apparently Hitachi did not get everything IBM has ever cooked up when it comes to disk technology. My guess is there are some disk-like technologies, such as optical storage, that IBM is holding onto.
In any event, Hitachi and IBM have agreed to merge their disk drive assets—patents, people, and plants—into a new company that is based in San Jose, California, the home base of IBM's disk operations. This new company, which doesn't have a name yet, will presumably be given some seed funding by Hitachi, which has set it up as an arm's-length unit so it can distance itself from that unit's woes in the event that it runs into problems. When the deal is completed sometime before the end of 2002, Hitachi will own 70 percent of this disk company and IBM will own 30 percent. Jun Naruse, a managing director at Hitachi in Japan and the former CEO of the Hitachi Data Systems disk array division of Hitachi (which also used to make clone IBM mainframes), will be CEO of the new disk company. Douglas Grose, formerly general manager of IBM's Storage Technology Division, will be chief operating officer. About 18,000 IBMers will move off IBM's payroll and onto the payroll of the new disk company, and about 6,000 people will be transferred from Hitachi's disk drive operations to the new company. Hitachi says that it will select the board of directors and management for this company and that Big Blue would have no involvement in its operations whatsoever.
Over the next three years, Hitachi will pay IBM to acquire its stake in this company. Both Hitachi and IBM have committed to multi-year disk purchasing contracts with this new disk company, although exactly how much they are committing to remains to be seen. IBM sold $3 billion in disks a year, and a lot of those sales were to its own divisions. Hitachi sold about $750 million in disk drives last year. Trying to sell $3 billion in disks, forget the $7 billion target Hitachi has set for the new company for 2006 or 2007, is going to be quite a feat for the Hitachi-IBM partnership, considering that its biggest customer—none other than IBM—will be buying disks from its rival—Seagate—to use in PCs, workstations, servers, and storage arrays.
Hitachi says that the new company may hit $5 billion in sales in fiscal 2003. But even that may be a lofty goal, considering that Seagate and Maxtor are fierce competitors in this $20 billion raw disk market. Since IBM will be second-sourcing disk drives from Seagate, as well as buying from the Hitachi-IBM partnership, it seems clear that Hitachi is counting on market share gains against Seagate and Maxtor at other PC, workstation, and server vendors to hit these revenue targets. Maybe Hitachi reckons the IBM name had been holding Big Blue's raw disk business back, and that by making a truly independent company it can compete against Seagate and Maxtor more effectively.
Exactly what this deal means for iSeries disk subsystems and Shark arrays is unclear. What is obvious is that IBM, by virtue of owning its own disk manufacturing company, could enhance its disks in ways that would help its server lines. Now it will have to take whatever innovations come its way from third parties, and these enhancements will go to its competitors as well in the server market.
Linda Sanford, who is in charge of IBM's Storage Systems Division, talked to Wall Street last week and made it clear that IBM might be ditching the disk drive business that has given it so much grief in the last 18 months, but that Big Blue had no intention whatsoever of getting out of the disk array, network-attached storage, or storage area network businesses. In fact, the company is redoubling its efforts to create innovative technologies that make it easier to build, maintain, and interconnect storage devices of various kinds. IBM is working with Hitachi, which sells enterprise storage arrays against IBM's Shark arrays, directly and through Hewlett-Packard and Sun Microsystems, to create more interoperable products. IBM and Hitachi together have enough clout in the market to lean on the juggernaut in the market, EMC, to play nicely and openly.
This part of the deal could turn out to be a good not only for IBM's books but also for IBM's customers. We'll see. Such wide-ranging partnerships do not always deliver real products.
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